All Forum Posts by: Account Closed

So apparently The Coke Can Multiplier is some sort of a hotel valuation technique that can drastically send the wrong message about the value of a property. Do hotel owners really use this to buy and sell property? The Coke Can Multiplier seems to suggest the value of the hotel property = Number of rooms * $100,000 * Price of can of coke at on-site vending machine.

I happen to be looking to buy a hotel with these numbers:
# of rooms = 200;
Median nightly rent (area specific median) = $109
Number of days per year = 365;
Occupancy rate (national average)=65%
Revenue per year = 200 * 109 * 365 * .65 = $5,172,050
Revenue per door = $5,172,050/200 = $25,860
Estimated net profit = $478,932

Hotel/Lodging industry data (see table below)
median net profit margin = 9.26%
median price-to-sales=2.13
median price-to-earnings=29.59

So if the Coke Can Multiplier were correct, it appears the hotel is worth (based on the price of coke at a nearby commercial facility): 200 rooms * $100,000 * $1 or $20,000,000. If we check this against yet another multiplier approach, the room rate multiplier, the property is worth: 109 *1000 * 200 or $21,800,000. Sort of close or is it?

The stock market seems to be sending a completely different message though; unless of course stock prices are currently undervalued, although the stock market generally has been experiencing positive gains last few years.

Based on the hotel/lodging industry data (see table below), mean price-to-sales ratio = 2.13. This seems to suggest a value of the property of about: { $ 5,172,050 * 2.13 } or $11,016,466.

Again, using the hotel/lodging industry mean price-to-earnings ratio of 29.59, this would suggest a property value of: { $478,932 * 29.59 } or $14,171,593.

So the 200 room hotel is worth somewhere between $11,016,466 and $14,171,593 in a rent ready condition. At these prices, it appears a can of coke would have to be priced at $0.54 to $0.70 if it were to signal actual property value. That is almost below wholesale. You literally might direct traffic from the convenience store to your hotel at that price.

The 200 room property in question, according to owner relative of sorts, says last he 'heard', the asking price was around $4.2 million (“as is” condition); but that building requires 'an exceptional and significant' amount of work.

Is the 'apparent' discount supposed to hint the level of rehab work to be expected or are stock prices just inflated? The market has been making almost outrageous gains last few years so perhaps there is a bubble in the price that may throw the numbers off. Some may say heck no, the stock market is still recovering from the recent 2008 hangover, prices aren't inflated.

The income approach can be a pain when trying to estimate income and expenses for 10 years out or to decide what actual holding period, discount or capitalization rate to use some of which can be almost pure speculation but I would like to hear how any numbers you are experiencing mirrors what is happening in the stock market if it actually is. 

The net income of 9.26% does seem painfully low and market price-to-sales and price-to-earnings ratio may be inflating acquisition prices or is that the case?

| Hotel Valuation | Room Rate Multiplier |Coke Can Multiplier | Price-to-Sales | Price-to-Earnings | Discounted Cash Flows |

@Joshua Johnson With the hard money lender charging you anywhere from 12% to 14% on loaned funds, flipping is hardly a 'hobby' or 'fun'; its an extremely risky venture with very little or no margin for error. 

Explain to the wife, risk is sometimes unavoidable where there is gain. Of course if things go south, you also risk sleeping on the couch for a prolonged amount of time or the cat being your new best buddy.

@Hurricane Hamilton You are buying a home for $10,000? Does it have a roof or that's just the price range in the market where you are buying?

@Frank Chin Regardless of what county level process is, typically if the mortgage is current, there is usually no reason why the bank would be paying property taxes for homeowner. The banks generally aren't that nice. 

If the homeowner neglects to pay property taxes, there would be a tax lien placed on the property, and is paid first before lender if property were to be sold. This is a completely different can of worms.

If homeowner defaults on mortgage and bank already foreclosed on them, then bank would be paying the taxes while its in process of selling it. 

If at anytime the person paying the property tax, appears to be an individual and not the bank or the bank's agent, or mortgage servicer etc., it can be assumed the homeowner haven't been foreclosed on yet.

Someone is paying the property taxes -- either the homeowner or the bank. 

Tax records have a way of being accurate because the county has a way of getting its money. Someone will be bidding on the tax certs soon enough if the county isn't/wasn't paid -- bad contact info of record or not.

@Chris Mignone If it is $250,000 in cash... unless you are just extremely attached to rentals, have you looked at rehabbing and flipping? Flipping isn't everyone's cup of tea but its slightly more aggressive a strategy; upside (downside), you can double (or loose) your money faster. Ideally you want deals were you use as much leverage as possible without using cash unless for down payment etc., but $250,000 cash can fund quite a few flips based on what market you were in.  

@Anna McGill The lender or investor in your project certainly wouldn't want to hear that you are having troubles tracking investment funds... even if it were personal funds, this is one area you want to have a tight grip on. You may have to clarify exactly what is meant by a "team making purchases".

What works for others, in terms of how they budget and track expenses and what works for you, may be two different things. The scale and scope of what you are doing determines much of it. 

If you are talking one or two properties and have a fairly good understanding of microsoft excel, you can use it for some fairly complex activities beyond just tracking expense. If you need an actual accounting solution to both track expense, generate reports etc.. you can use tools like GnuCash [which is free by the way]; or you could also use quickbooks, peachtree etc. 

There are tons of solutions, you just have to find which works for you based on what exactly you have going on; but having firm control on project spending is not even an issue to flinch on - its a necessity.

@Kyle J. What is actually baffling is that a retiree on a pension is planning on renting in California, which has a reputation of being one of the markets with abnormally high price growth. If they were buying to get in on the action that might be viewed different but rent? Sure.. you take the rent money.. but if this is a retiree on a pension and no other source of income.. you only hope this wasn't a retirement plan suggested by someone with interest in the property being rented.

@Nick B. If market conditions in San Francisco persist for the next 30 years, price trend (ceteris parisbus) would continue in the general direction it has been the last few decades. 

What isn't known with specificity, is what shifts will occur with its population, local and regional economy, housing stock, demand for housing etc. in the future other than analyzing historical trends. 

The market is always moving, up, down or sideways and unfortunately, some investors will often buy just before a downturn.

@Nick B. 

If you are in certain nooks of California or in markets around the country were average home value is almost 7 or 8 times national average (if not more), you would be amazed what you yourself would do at certain rates. 

Rates move markets. If rates are unusually low enough, an unusually high amount of buyers would typically enter the market, which can drive prices up. If you are buying at the prevailing price in such an environment, you are likely buying at some level of inflated prices. 

A strong motivation to buy doesn't always mean buyer will always buy a property in excess of actual market value. They can just divert the intensity and motivation to buy to an underpriced or fairly priced property -- if there is actually inventory.

But if you are in a market with few or scarce inventory, and rates are unusually low, and you have to buy, some will overpay. 

In San Francisco, sellers frequently get offers from buyers in excess of listed price purely due to the economics of the market there.. demand often is in excess of supply. If at one rate your mortgage is 3 times in excess of the average rent and at another rate, your mortgage equals (barely) market rent, you want to guess at what rate buyers will jump furiously into the market?

If a property barely cash flows at a low rate, whether you buy or not depends on your actual investment goals and objectives. Different markets experience yearly price growth that vary drastically; this may soften the impact of negative cash flow in markets were average values are extremely pricey compared to the national average. 

Some investors though, pricey or not, won't buy a rental if it doesn't cash flow and especially if property values move at a snail's pace on a per year basis.

@Michael Le The SECs intent is not exactly to regulate the suicide rate due to an investor sustaining an investment loss. Its more about things like: protection of investors from scams, ensuring transparency and market efficiency etc.. 

Bernie Madoff ripped off some very sophisticated and accredited investors in every sense of the word. Investors whether individual or institutional and regardless of their level of sophistication will alway face the probability of investment loss because investments generally have an element of risk to it and you can't regulate a risky investment into a riskless instrument. 

But loosing money because you mistimed/misread the market or just bungled a forecast (and many PhDs are good at this), is different from loosing money because someone hid, failed to disclose or deliberately misrepresented a material fact through a fraudulent deliberate scheme of some sort. The material intent of regulating securities is to minimize any occurrence of such fraud or investor abuse.

If suddenly all buyers of real estate, residential or commercial, were required to meet the accreditation test because the SEC or government felt a need to protect the public that would really expose the flaw in the logic. This doesn't mean there aren't people with very sick intentions out there.